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I read the Money Magazine article this last issue that says it's better to hold stock index funds, stock ETFs, and dividend funds in taxable accounts and outside the IRA to take advantage of long term capital gains rates, and to hold bond funds, and actively managed stock funds that trade a lot in tax-deferred accounts...

#1) True?
#2) What would be regarded as an "actively managed stock fund"?
#3) Is it "better" to hold stocks outright in an IRA or outside of it?

We are opening an IRA to supplement a 401k. We thought we would put some ETFs in the IRA...This sounds like a bad idea if I go by this article.

Thanks Fools
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1) Depends on your tax rate. It may make no difference for lower income households.

2) Actively managed would be one where you have turned over buy and sell decisions to a fund manager in one form or another. Such is likely to generate more activity which would result in more taxable gains (short and long term) on an annual basis if held in a taxable account.

3) It depends. If all else is equal, individual stock outside of an IRA is better; especially if your tax bracket would have you pay taxes higher than 15%.

We are opening an IRA to supplement a 401k.

Caution. Your ability to claim a tax deduction on a traditional IRA may be prohibited if you are covered by a 401k.
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Everything in your IRA eventually gets taxed at ordinary income tax rates, but those taxes are deferred until you take distributions (or do a Roth conversion).

All of the dividends and capital gains paid from mutual funds or ETFs and many stocks are qualified dividends. This means they get special income tax rates provided dividends are qualified and capital gains are long term.

Interest is taxed as ordinary income.

So if you have investments that trade short term, ie, held less than one year, those are better in an IRA. So is anything paying interest. Bond fund. Bonds. Dividends that are not qualified (but watch out for UTBI from master partnerships).

IRA is best managed to pay those income taxes when you have low income tax years. You can at least do partial Roth conversions to take advantage of those lower tax brackets--even if you are not old enough to take penalty free distributions, usually after age 59-1/2. If you find yourself in the 15% bracket, use it all. Some would continue all the way up to the 25% bracket, but after that it gets iffy. Depends on your circumstances.

Generally long term buy and hold is better than IRA investments from a income tax point of view. However, it can be remarkably difficult to find investments you can truly hold long term. That is the major advantage of the IRA. You don't have to worry about taxes. You can make decisions based solely on investment quality.

I don't think the Money magazine article makes a lot of difference to many of us, but it is something to be aware of and see what fits in your situation.
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Income is 60k

"Caution. Your ability to claim a tax deduction on a traditional IRA may be prohibited if you are covered by a 401k"

...OK, now you have my attention...can you help me fill in the blanks on that one? "covered by a 401k"...?
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Caution. Your ability to claim a tax deduction on a traditional IRA may be prohibited if you are covered by a 401k or any qualified pension plan.

Your IRA contribution becomes non-deductible beyond certain income limits. That income limit is reduced when you participate in a qualified plan. The contribution is still allowed above the limit, but it is no longer deductible.

But if your IRA contribution becomes non-deductible due to income, consider a Roth IRA instead. Roth contributions are not deductible, but the distributions are not taxed in retirement. Hence, Roth is preferred in some cases. But not Roth has an income CAP that prevents contributions above certain limits.

For complete information, the IRS has excellent publications on this subject. IRS Pub 17 is a general overview, called "Your Income Tax." Or IRS Pub 590 is specific to IRAs and Roths. Both are available free from the irs.gov website.
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OK, Thanks so much.

Starting the IRA because my work 401k (I have aprox $210k there) has gotten a bit scary. It's a "pool" type of plan. In other words, we have NO say in what we invest in. We have NO on-line access to see and view...well anything.

What they invest in is what we get..no choices...very little in the way of re-balancing..and so on. Sooo, I'm trying to find other ways of continuing my retirement building outside of the 401k (unfortunately)

Thank you
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it can be remarkably difficult to find investments you can truly hold long term

Yes indeed. You never really know what is going to happen, so you need to react to the market as it happens.
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We are opening an IRA

The "I" is individual so are you opening one for each of the "we" ? If not, be sure the beneficiary is cleared defined.

Also, along with an IRA, consider the pros and cons of a taxable brokerage account as you decide what to do and why you are doing it.
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Since you have a 401k plan available to you whether you participate or not you are not allowed to claim a tax deduction for contributions to a traditional IRA.
I do not recall reading the Money article you made reference to, but, it sounds as if they were addressing the tax efficiency of various investments. The most tax inefficient investments are best held in a tax deferred account. These would be most bonds and bond funds and REITs. However, almost any investment is suitable in a tax advantaged account.
The most tax efficient investments are better held in taxable accounts. This would include growth stocks, index funds, and many managed equity funds.

Bob
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Since you have a 401k plan available to you whether you participate or not you are not allowed to claim a tax deduction for contributions to a traditional IRA.

Not exactly.

When you are covered by a pension plan (including a 401k) at work, you can still deduct an IRA contribution if your income is below certain thresholds (around $60k for singles and $100k for joint returns - but that's just off the top of my head, so be sure to look up the exact numbers if it's important).

--Peter
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Since you have a 401k plan available to you whether you participate or not you are not allowed to claim a tax deduction for contributions to a traditional IRA.

Sorry, that's not correct. There are lower income limitations placed on the deductibility of IRA contributions for those who have a 401(k) or other retirement plan available, whether or not they choose to participate. Details specific to the OP's situation (income level, filing status and spouses' retirement plan availability) can be found in IRS Pub 590 http://www.irs.gov/pub/irs-pdf/p590.pdf

As an example, a singler person who is not covered by a retirement plan (including a 401(k)) at work is allowed to make a deduction for the full amount of the contribution they are eligible for, no matter what their MAGI (Modified Adjusted Gross Income). However, a single person who is covered by a retirement plan at work, is only allowed to make a fully deductible contribution if their MAGI is $56k or below, and is able to partially deduct a contribution with a MAGI of between $56k and $66k. The contribution is not fully non-deductible until their MAGI is greater tha $66k.

AJ
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Peter and AJ, thanks for making the correction to my statement.

Bob
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Great Information..all of you,Thank you!

With respect to the current situation : 2012 income = 75K, single, 401K, homeowner...Then I see this as she's better off funding a ROTH due to her not being allowed to deduct the IRA funding. But..over the years she has dumped about 12K yearly in to her 401k. So, with her not wanting to fund the 401k any longer, (until the company offers more transparency and options for investment...which may never happen),...how does one continue to build for their retirement with such limited tax shelter options..buy a second house?? :)?
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how does one continue to build for their retirement

You can save for retirement in ordinary taxable accounts. Really. It's OK.

The tax shelter of IRA and 401k accounts merely plays a bit of tax rate arbitrage between now and the future. You are not going to make or break a retirement by choosing the right (or wrong) kind of account for your retirement savings.

The only guarantee is that if you don't save money for retirement, you won't have any money for retirement.

--Peter
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Roger that, Thx Peter..and all the Fools
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A couple more points to consider regarding IRA and 401k accounts:
1) Retirement accounts are generally untouchable in bankruptcy proceedings. While this may look like a remote possibility for you now, financial situations can change drastically on a dime and I personally like the security I feel in that I'll still have money left over if something like that should happen.
2) For Roth IRAs, you can withdraw the full amount you've contributed (not any gains) at any time with no penalty. Of course, you will no longer have that in your retirement account unless you return it within the rollover period, but it's another nice safety net.
3) While you may be theoretically more efficient with certain investments in a taxable account due to paying a lower tax rate on the capital gains, you have to consider that when you start withdrawing these funds out of a similar IRA account, you will likely be in a lower tax bracket anyway and supplemented by social security with a house paid off. You will only need to pull the money you are mandated to pull plus whatever you actually need. You are earning more than you need to get by now and saving the rest. In retirement, you won't be saving the money you withdraw unless it exceeds your needs due to the mandatory amount. Also, the non-taxed dividends and capital gains in your IRA will be compounded for years before any tax is paid. I have to believe that it is likely a wash at worst (depending on your time horizon).

Tom
~who appreciates anyone correcting him for any errors presented due to misconceptions
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1) Retirement accounts are generally untouchable in bankruptcy proceedings. While this may look like a remote possibility for you now, financial situations can change drastically on a dime

The majority of bankrupcy proceedings start not because someone was foolish with their money but because of a health emergency which leaves a huge bill, even INSURED people can get caught by this.

CNN's Anderson Cooper had a good piece recently about a guy, with insurance, went to ER with trouble breathing and 4 days later the hospital let him go and sent him a bill for over $450,000.

Could he have forseen this? No. Did he have insurance? Yes.

America's health care system is downright scary. I hope hospitals can't get at my 401K either.

As we accumulate, I wonder if it wouldn't be prudent to see a lawyer and get more of our assets stashed away into 401K's, IRA's, LLC's or Trusts for this very reason. Maybe Mittens had a good idea storing all his money in the Bahamas and burying his tax returns. Surely there's something the non-billionares among us can do, though.

SG "wanting to cover my assets"
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